Don’t stop giving to charity during Rocky Markets – just give smarter

From inflation and rising interest rates to market volatility, recent headlines may have even the savviest of investors worried about their finances. But the key to weathering market volatility is simple: keep your long-term perspective – these fluctuations are normal and expected. For charitable people, this advice takes it a step further: keep giving, but make sure you donate strategically.

Why should you keep giving? Because charities desperately need your help.

Nonprofit organizations and the communities they serve still face urgent needs after the pandemic, the humanitarian crisis in Ukraine, and racial and social justice bills. Many companies and individuals also adequately screen their donations with the goal of expanding their philanthropic mission — meaning their “usual” bucket of donations could be split as they increase their donations to different charities.

It’s not a bad thing to support more charities and respond to needs in a timely manner. But in the face of all of these unexpected needs — on top of market volatility and inflation — I’ve heard from dozens of nonprofit executives who are worried their donors won’t be able to keep up the same level of much-needed support.

If this all sounds overwhelming, you are not wrong! There are so many needs, but donors like you are already making a difference to make a difference. When you’re ready, you can help meet the needs of established and emerging charities with smart giving strategies, starting with the assets you use to donate.

Give smarter by choosing the right asset

When you’re ready to give gifts, put away your checkbook and by all means don’t take out that credit card! Certain stocks in your portfolio can still appreciate significantly after years of market growth — making them a great charitable asset. This is especially true for some sectors that react differently to market volatility.

By donating long-term valued stock to charity, you’re generally eligible for two tax benefits — making this a more strategic approach than donating with cash or credit.

First, your donation may qualify for an appropriate tax deduction at market value. Second, you potentially eliminate capital gains taxes you owe on increases in value — which can still be significant. Compared to donating money or selling your securities and collecting the after-tax proceeds, you may be able to automatically increase your donation and tax deduction. In other words, you can give more and save more.

Integrate donations into your rebalancing strategy—while resetting your cost base

When a portfolio is overweight equities, it increases vulnerability to market corrections. Reducing risk usually means selling valued positions, triggering a capital gains tax liability.

Instead of selling the valued positions to balance your portfolio, consider donating a portion to charity. In line with the above strategy, you may be eligible for these tax benefits here.

And if you already write checks to nonprofits, you could use that money to buy new stock instead — or buy them back and reset your cost basis. Not only does this strategy allow you to continue investing in a desirable asset, but it can also help you achieve long-term tax efficiency. If the stock continues to appreciate in value thanks to the higher basis, you’ll owe less future tax if/when you decide to sell it. And if the price falls while the market continues its normal volatility, you are more likely to be able to reap a capital loss to offset realized capital gains.

Don’t be afraid to look beyond your publicly traded investment portfolio

You might make a commitment to support your favorite charities when they need you most, but market fluctuations are affecting your portfolio more than you’d hoped. Certain charities can accept both privately held equity and publicly traded stock – and the appreciation in the value of these non-public assets often makes them an ideal place for charitable donations. Do you own privately held C or S Corp stock? Are you preparing to sell your company? Perhaps you have private equity holdings or restricted stocks. And don’t forget your equity return as a strategic source of funding. Often these income “assets” are overlooked or seem “untouchable”. However, equity rewards are becoming an increasingly important and strategic source of funding for charitable causes. Exploring your range of financing options can help encourage giving with great impact – contact a trusted advisor for help.

To simplify it further, consider a strategic giving vehicle like a donor-advised fund, which is like a charitable investment account that allows you to contribute a variety of assets and invest the balance for potential growth. Charities that sponsor donor-suggested funds can often accept gifts of these more “complex” assets and convert them into charitable dollars that you can use to fundraise with greater impact. Once you’ve funded your donor-recommended fund, you’ll have access to a “ready reserve” of donation funds, allowing you to support multiple charities with a single tax-deferred donation – all in a timeframe that suits you. It also means you can fund your account when it’s financially beneficial, creating that standby reserve to continue your giving even during economic downturns.

Use the moment for Roth conversions

If market volatility has resulted in a lower balance in your retirement account, this could be a good opportunity to convert a traditional IRA or 401(k) to a Roth IRA. Roth IRAs allow you to set aside after-tax income, requiring you to pay income tax on the balances you convert from a traditional IRA to a Roth IRA. The deduction from a charitable contribution made in the same year can offset the increase in taxable income caused by the conversion.

For example, if your traditional IRA balance dropped to $500,000 during the recent market swings, consider converting to a Roth IRA now – especially since your tax bill will be lower than if you converted a few months ago. If you’re in the 37% tax bracket, converting $500,000 into a Roth IRA would typically result in a $185,000 tax bill. But if you combine the conversion with a $100,000 tax-deductible charitable donation — as long as you’ve already exceeded the standard deduction — you end up owing the IRS just $148,000.

As you consider the conversion—and depending on the size and potential taxes that the conversion will trigger—you might consider donating to a donor-recommended fund for several years in the year of the conversion. This strategy is sometimes referred to as bundling. When the market recovers, not only will you be on the tax-free side of the equation with your newly characterized Roth IRA, your initial tax-deferred charitable donation also has the potential to grow, giving you more funds to support your favorite causes in the future.

Weather the storm – sunny days are coming again

With preparation and planning, you can be the hero of your favorite charities by continuing to support them during market volatility – especially when others have to withdraw their annual donations. According to GivingUSA’s annual report on American philanthropy, charitable giving has steadily increased since 1980 — few times has it declined, accompanying bear markets or recessions. Regardless of how the market is behaving, working with your advisors and utilizing these fundraising strategies can help you weather the storm while making a bigger impact.

The tax information provided is of a general and educational nature and should not be construed as legal or tax advice. Fidelity Charitable does not provide legal or tax advice.

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